James Bullard just gave a speech that seems to be flying under the radar tonight. In the speech he basically is saying the Fed needs to mount a communication campaign to convince the market that a slowing jobs growth market is ok and natural thus allowing them to stay on course to raise rates in December. A couple of things come to mind: 1) They know the number and the jobs growth number tomorrow is likely sub par and 2) They are going to raise rates anyway criticism be damned. Bullard is a slight Hawk but he also noted that the Fed used its statement last week to reel in market expectations which had pushed the rate hike into next year. Those statements had the blessings of Janet and I think Bullard is not off of the reservation on this one. I think the Fed is communicating to the market that “we” are going ahead despite the data between now and December. Below is part of the interview:
The Federal Reserve has been struggling to convince investors it is about to raise interest rates and now faces the risk that a likely slowdown in job growth will be interpreted as a downturn in the broader economy that will cause the Fed to hold off yet again, St. Louis Fed President James Bullard said on Thursday.
In an interview with Reuters, Bullard said U.S. central bankers may need to mount a new communications campaign to convince markets and the public of a counter-intuitive idea: that slowing monthly job growth is natural at this point in the recovery, and will allow the Fed to stay on track for a likely December rate hike.
Job growth averaging more than 200,000 per month during the recovery is unsustainable, Bullard said, estimating that growth of between 100,000 and 125,000 per month would be enough to account for an increasing population and a trend rate of economic growth.
“This is not Lake Wobegon. You cannot be above average all the time,” Bullard said. “I don’t think markets have absorbed this. Everyone has in their head 200,000…The natural expectation is for the pace of job growth to slow in the months and quarters ahead. We are expecting that to happen. It would be normal, and that would not indicate poor macroeconomic performance.”
The market participants are not ready for this kind of thinking. I did a twitter poll and asked if folks thought they would raise rates no matter what happens before December. The poll results were 80% in favor of ‘no’ they will not raise rates in December and they will add more Vodka to the punch bowl instead. I think the Fed is moving forward with rate hikes and I don’t think they care what happens to asset prices in the short term. I don’t think many are prepared for that outcome. I believe they want to test the waters and see what happens. Janet did put NIRP on the table just in case and gave herself an out.
If you are a GenXer like me you must remember the show Different Strokes. Well the market may be about to have an Arnold moment “Whatcha Talkin Bout Bullard!”
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Do you, by chance, follow AEP at the Telegraph?
Flipped bullish based on M3. Addresses some China fears as well.
http://www.telegraph.co.uk/finance/economics/11973507/Ill-eat-my-hat-if-we-are-any-where-near-a-global-recession.html
I must admit, I’ve been in (cash) the camp that the rally since 9/29 might have largely been a squeeze, but now…I just don’t know. I can click through a list of a dozen major negatives off the top of my head, yet I find little fault in AEP’s argument.
Asset prices seem to be sitting on a combo trap-door/ejection seat…they’re headed up or down to the tune of 10-20%, I’m just not sure in which order.
Who honestly cares about 25bp? From a HY perspective, spreads appear to generally come in as rates rise (though it is still net negative), so assuming oil gets back to $65, I don’t foresee any systemic credit events. Equity shouldn’t be hurt too bad – dollar has already been stronger for 2 years so comps should start easing at some point… If we start getting to 1% or tighten quickly, I will be more concerned. Cash currently is unattractive from a relative value perspective and I don’t think 25bps changes that… honestly don’t get the big deal.
And I get the credit cycle slowing could result in significant issues down the line, but 25bps probably doesn’t do that.
graystoke,
I am open to other possibilities but I just don’t see it yet. The next correction will be telling if we roll and go to news highs then perhaps I am wrong.
djmarcus,
you may not care but expectations of the market is leaning towards they won’t do it. So its true while it might matter in the short term. In the Long term it might not matter.
Not sure how this is sourced/compiled offhand, but I’ve seen this cited multiple times. From what I’ve read, market seems to be expecting a hike in December: “Yellen’s remarks caused investors to reset expectations of a December rate increase to above 60 per cent.” http://m.economictimes.com/markets/commodities/gold-at-one-month-low-as-december-rate-rise-still-on-table/articleshow/49679092.cms
djmarcus,
while that is true it is fixed income participants and if the jobs number is bad that will go lower as people will think the Fed will not hike. The point of this post was to say if the data gets bad they may hike anyways.
BlueStar, didn’t you write yesterday that because Yellen was talking about NIRP at the same time as raising, that she was lying about raising in December? That was in comments to your last article.
Damian,
You speak the truth. As of yesterday I thought she was lying. But with this Speech the NIRP comment makes more sense now. They are basically going to try and raise and see what happens. If the shit hits the fan they now have NIRP in their back pocket. The bottom line is these folks are flying by the seat of their pants and are praying that stuff does not blow up.
Clearly they knew the number was good so Bullards comments were meant to be forward looking. If November stinks we are going to launch higher. I think its on until we get a serious market tantrum. Until then full steam ahead.
It’s plausible to me that they hike into weakness (it’ll probably be a mistake in my opinion). I think they are betting on the market interpreting it as a sign of health. Problem is all their so-called metrics are deteriorating- a data dependant fed won’t hike in Dec. but we all know asset prices are their only barometer right now.
If the hike and Q4 GDP is bad, w/ downward revisions to Q3 GDP estimates they risk credibility.
Rates must rise, Paul Volker style.
The Fed seems determined to hike. Why is beyond me other than for credibility sakes. When it happens next month, think the markets plunge. Ready.
@djmarcus should have joined blog ranks here to blog about his perspective on credit markets.
Everyone has forgotten that the Fed cut all the way down in 2000-03 and 08-09.
Everyone seems not to grasp that the Fed follows not leads.
The market will have its way, up or down, irrespective of the overnight rate set by any central banks.
Central bankers reading this blog must chuckle at the naïveté of most.
GM, on that we would agree. Notably, the ultrabond futures broke the lower trendline Friday. However, the yield charts of the underlying $TNX and $TNB do not look bearish to me. In fact, the UB break combined with the “good” job news is exactly what I want to see for the Bluestar scenario. Only thing missing was a big drop in the $VIX.
I think that the UB move was a fakeout, not a breakout.
Now we know jobs exploded to the upside
and yet the participation rate is lower-HMMM.
Ford offered more than they needed to
settle a contract -why.Are the border
controls having an effect on job applicants.
I think Yellen raises even though it is
not needed to show she matters.
I’m not sure rates are going to get raised in Dec, despite the Fed’s statements. This market feels like the squeamish are listening and selling now but the big money is calling her bluff; hence we’re not rolling over.
Sell, it has begun.
Hell, the complacency and calm is overwhelming, just like just before the August decline.
We already took out last week’s low intra-day.
No one has noticed that.
This thing could be huge, no one, no one, is expecting anything but a little dip, and a rally to new highs.
I am +3.5% on a 3x short FTSE ETF.
Anyone else aboard the bear train?
GM,
SHHH! We are hunting Wabbits!
I’m on board! – but small scale. I’ve learned to keep the bulk of my fortune in boring real estate (at low LTV) and keep my educated (and admittedly amateurish) gambling in the “markets” to a minimum.
Max pain.
@GM yes still holding SH from 21.50’ish.
that 60% number is calculated on bloomberg (for anyone with a terminal) and is a calculation of the implied probably of a fed hike by looking at fed fund futures and options on fed fund futures – changes day to day. the exact % isn’t important but big changes may be. b4 yellen & jobs it was like 27% chance of hike in dec.
@BlueStar – What’s the significance of of the TED Spread lower (22.94bps now ) while HY spreads continue to widen out to 460 after bouncing off 418?
I’ve never paid attention to TED spread before.
Also what’s you view on these negative swap spreads in the back end?
probucks,
Basically the same thing happened in August right before we melted. I think it is saying that short term US rates are going higher while LIBOR has yet to adjust higher. My guess is it will pop a lot higher over the next several weeks. The negative swap spreads are being discussed by many as nothing worry about and thats its just technical. To me it is suggesting that something is about to break and very soon.
BlueStar, I noticed the link to your blog is no longer on the top nav of ibankcoin. Hope you are still going to keep posting.
North Beach Capital,
I was moved to the peanut gallery. You can find me there. I don’t post enough to be on the front page. I am a guest blogger and I like t that way.
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